Today, and from time to time, Global Tax Forum will answer reader questions, just like the weekend forums.
We'll discuss the taxability of U.S. brokerage accounts and resident vs. nonresident tax filing requirements, and we'll point a Canadian reader to some resources on how U.S. tax law treats foreigners. So read on.
If you have any other questions about the impact of U.S. tax laws outside our borders, send them to
email@example.com. Please remember to include your full name and resident country. Global Tax Forum appears every other Wednesday.
U.S. Brokerage Account Taxes
I have a friend who lives in China and who is interested in opening a brokerage account in the U.S. If he chooses to do so, does he have to pay tax on the capital gains, interest or dividends? -- Henry Liao
I'm assuming that your friend is a nonresident alien: He's not a U.S. citizen and does not live here.
If so, he will not pay any capital-gains tax on trades of stocks, bonds, mutual funds, whatever.
And a nonresident alien will not owe tax on interest from bank accounts or certificates of deposit. (Capital gains and interest connected to a trade or business are a different story.)
On the flip side, withholding is required on any distributed dividends. Basically the U.S. is making sure it gets its tax money before your friend gets his dividends. Usually, when dividend distributions are sent to someone with a foreign address, 30% are withheld unless a treaty dictates otherwise, says Joe Parker, a tax research analyst at
Some treaties allow for lower tax rates. Residents of France, for instance, are subject to 15% withholding. There is no withholding requirement for Belgium residents. Unfortunately for your friend, Chinese residents are subject to the full 30% withholding rate.
Your friend will have to file
-- Certificate of Foreign Status
, which will tell his broker that he's a nonresident alien and which country he's from, so that the proper withholding percentage is applied.
Am I a Resident or Not?
I was a U.S. resident with a H1B visa for six years. I do not hold a green card, but I hold a valid Social Security number. I am currently working in Europe as my visa has expired. The Immigration and Naturalization Service says I will have to stay outside the U.S. for one year before I can re-enter with another H1B visa. I was trading with an online broker when I was in the U.S. I do still trade with the same account from Europe. I have made quite a bit of money as a daytrader. Am I still obliged to honor the 1099 from the broker to the IRS? Can I ignore the 1099 and not have problems when I come back into the U.S.? I do realize the INS, IRS and State Department are disjointed. -- Bala Sundarum
Disjointed is an understatement.
Here are the tax rules. As long as you're not a resident of the U.S., you will not be subject to most U.S. tax rules. So follow the tax rules outlined in Henry's question above.
But here's the tricky part. When did you become a nonresident?
The basic test says that if you were in the U.S. for 183 days of the year, you're a U.S. resident as of Dec. 31, regardless of where you lived the rest of those days.
The exception is if you can show a closer connection to another country. If you're going back to your home country where you have family, a home or a driver's license, you most likely can prove you have a "closer connection" to that country. In that case, your residency status changes on the day you leave the U.S., says Parker.
As an aside, having a Social Security number simply allows you to work in the U.S. It doesn't have a whole lot to do with your tax status.
Must I File a Return?
In a previous Global Tax Forum, you wrote that non-U.S. residents or citizens are not required to pay tax on any capital gains or interest generated from U.S. securities. I just talked to a tax adviser at the IRS today, and she told me a foreigner needs to file his tax return either as a resident (Form 1040) or as a nonresident (Form 1040NR), depending on how long he stays in the U.S. and that he must report
income generated in U.S., including capital gains and interest. I am a little bit confused here. -- Yu Choi
Lesson No. 1: IRS agents are often wrong.
Lesson No. 2: When in doubt, read the instructions for the form.
The instructions for
-- U.S. Nonresident Alien Income Tax Return
say that as long as you -- a nonresident alien -- are not engaged in a trade or business and all the U.S. tax that you owe was withheld, then you don't have to file a return.
So if your only income was from your U.S. investments and the proper amount was withheld on any dividends distributed, you do not have to file.
But let's say you never filed a Form W-8. Then your broker would have no choice but to withhold 30% of your dividends. If your treaty says only 15% should have been withheld, the U.S. would have kept too much of your money. You would need to file a 1040NR to get your money, says Parker.
You also must file a 1040NR if you're engaged in an U.S. trade or business, if you have other U.S. income or if you represent a trust or estate or a deceased person.
Overseas Reference Guides
As a Canadian, I know I can trade U.S. securities as long as I look after local tax issues. One question, though: Can you point me to any Web site that has even a general discussion of U.S. tax treatment of foreign investors (especially, in my case, Canadian, as I believe our countries have certain unique tax treaties)? -- Stewart Lindsay
I would start with the publications available for free on the Internal Revenue Service's
-- U.S. Tax Guide for Aliens
is a great place to start.
-- U.S. Tax Treaties
offers a summary of all tax treaties the U.S. has with its allies.
But the one for you is
-- Information on the United States-Canada Income Tax Treaty
. This document should have all the specifics you'll need.
Global Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.